Credit Benchmark Cited In FT Article On UK Loan Market Developments

Banks are pushing some companies seeking to borrow money in the UK to agree that the cost of their debt can rise if the country votes to leave the EU next month.

The introduction of “flexit” clauses into loan documents, allowing banks to increase the interest rate they charge in the event of Brexit, underlines fears that borrowing costs will jump if Britain votes to leave the EU.

The move could deter some companies and private equity groups from investing until after the June 23 referendum on EU membership. The Bank of England has already expressed concern that companies are reacting to the uncertainty by putting decisions on hold.

Several big investment banks in the City of London, including Goldman Sachs and Deutsche Bank, have discussed a “flexit” clause with potential clients looking to borrow money before the referendum, according to people familiar with the matter.

One banker said they knew of a sterling-denominated debt financing deal drawn up by a “magic circle” leading London law firm and a UK lender that allows the interest rate to be increased by 0.5 percentage points in the event of Brexit. Most syndicated loans include a clause allowing banks to flex the rate up if investor demand is weaker than expected, but the “flexit” is on top of this usual buffer.

Most discussions around using such clauses are with non-investment grade companies that are exposed to a potential drop in UK consumer spending and with private equity companies seeking funding for a leveraged buyout of such a company.

“It is possible that, where a business will be directly affected by Brexit due to the peculiar nature of that business (eg a car manufacturer reliant on EU exports without tariffs), the banks might consider something of this nature,” said Jennifer Marshall, partner at law firm Allen & Overy.

News of Brexit-related loan clauses comes as global banks have been turning more cautious towards the UK ahead of the June referendum on EU membership, according to a rating agency.

Credit Benchmark, which aggregates the internal lending risk assessments of big international banks and uses them to devise ratings, said lenders became slightly more cautious towards the UK earlier this year — after Boris Johnson, until last week mayor of London, came out in favour of “Brexit” in February.

Brexit risk was one factor behind the collapse last week of the auction of buy-to-let lender Charter Court Financial Services. The sale process was abandoned after bidders sought a Brexit clause to lower the price if the UK left the EU and the company’s private equity owners refused.

Chancellor George Osborne has suggested interest rates will rise if the pound slumps, bringing a bout of inflation and making households worse off. The chancellor said in April that the financial instability would imply “mortgage rates are likely to go up”.

While official interest rates are likely stay the same or fall in a Brexit scenario, banks may still be forced to raise the cost of loans just as they did in 2007-2008 if the UK is seen as a worse bet for lending.

Most bankers contacted by the Financial Times said they had not seen a “flexit” clause in a loan document and expected they would be used sparingly, particularly as borrowers would resist them forcefully. One private equity executive said there was “no way” he would ever accept such terms.

“We haven’t seen any Brexit flex clauses introduced into loans yet but banks are looking at it closely,” said one financier, adding the clause was most likely to be used for underwriting a loan before syndicating it to investors.

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